Tuesday, January 20, 2009

New Nepal Plunge in Darkness

Latest ScenarioAs far as the latest scenario is concerned, I am apprehensive that Nepal will have electricity crisis spanning next 10 years and further, if the relevant policies are not completely overhauled. NEA, during its anniversary celebrations, claimed that after five years, load shedding will be a matter of the history. This is not the full truth. The problem is as follows. NEA claims that another 806 MW will be generated in the next five years and there will be 1493 MW in total in the system and based on their own load forecast, the demand then will be 1271 MW (in peak season) which will lead one to jump to the conclusion that there will be surplus electricity. But in reality, 1493 MW will be the total installed capacity which can generate at full capacity only during the rainy season and it goes down to half to one third of the capacity during the dry/peak season, creating scarcity again due to short fall of 400/500 MW even if all the projects that NEA has in the pipeline are completed on time. There will be shortage of electricity in five years’ time by a higher magnitude if these projects are not completed in time, as is the general tendency.

Now that the government has set a target to generate 10,000 MW in 10 years’ time of which about 8200 MW is for export purposes and 1800 for domestic consumption, the total installed capacity for domestic consumption after 10 years will be around 2500 MW and load forecast for that year is 1900 MW; an apparent case of surplus generation. But again, there will be seasonal dearth of electricity due to the above-mentioned phenomenon. Even after addition of 10,000 MW capacity after ten years, load shedding will continue to exist. Therefore, the government needs to change its policy drastically and focus more on the hydropower development for the purposes of domestic consumption first.

In Nepal, the average electricity consumption per capita is 69 kWh per annum which in the developed countries it is around 20,000 kWh. Economy of a country is linked to the electricity consumption. Electricity can be used for industrialization, employment generation, agro processing, irrigation, cold storage, changing lifestyle and so forth. Even it can displace POL products for transportation by electrifying transportation, e.g. electric railways along east-west highway. By just undertaking Kathmandu-Birgunj railway Nepal can displace 120 thousand kiloliters of fossil fuel in a year. This can significantly reduce both trade deficit and balance of payment deficit of Nepal with India. The government is planning to construct fast track road linking Kathmandu to Terai instead of which it should have chosen electric railways in order to escape from the fossil fuel dependency syndrome.

The generation of 10,000 MW is possible only if the government can arrange to mobilize an investment of Rs 1,500 billion. It all depends on how effectively the government can lure the investors, which is not an impossible feat, though. Nepal is receiving Rs 150 billion annually from remittances from authorized sources which alone is sufficient for 1,000 MW. Therefore, 10,000 MW in 10 years can be generated from this source alone. But we don’t need to use remittance alone for the purpose; there are many domestic investors interested to invest in hydropower. Besides, there are foreign investors also interested in implementing hydropower projects. Having said this, 10,000 MW, therefore, is not beyond our reach. However, from infrastructural perspective, Nepal is not prepared for the implementation of this size of hydropower projects; we lack necessary infrastructure like access roads and transmission network. To some extent, these infrastructures will be developed by the investors as well but not all. Therefore, the government should also construct necessary infrastructures. Otherwise, the higher investment by the IPPs will be reflected in the bulk electricity tariff which ultimately affects the consumers making electricity unaffordable in this water resources rich country.

There are many people holding licenses for hydropower projects but they have not been able to implement due to lack of sufficient capital (some don’t even have fund to conduct feasibility studies). Generating one MW needs initial investment of about Rs 150 million. The government has been liberally giving away licenses to any applicant even to those without financial capability to mobilize necessary fund because of which power generation has been far less than the capacity of the licenses issued. This is a policy failure. On other hand, the NEA has been circumspect in signing PPAs which too has been creating constraint in the implementation of the power projects. Therefore, the government should ensure that the applicants have required capital before issuing licenses while NEA should sign PPAs liberally to solve the current constraint in power supply. Otherwise, the load shedding will grow year by year and will adversely impact our macro economy.

Reforms required1. Licenses should not be issued to those who are unable to mobilize necessary equity.

2. NEA should be liberal in signing PPAs but should implement penalty clauses against those who are unable to generate electricity in time or are more interested in peddling the PPAs.3. Domestic consumption of electricity should be prioritized. The government should ensure that 100 percent of its population has access to the electricity which now is limited to 25 percent that too with load shedding. Also increase the per capita consumption of electricity which now is 69 kWh. The politicians talk about transforming Nepal into Switzerland which will be possible only by increasing per capita electricity consumption in Nepal, too. The per capita energy consumption in European countries is over 20,000 kWh. Therefore, the priority should be that in next ten years, the per capita electricity consumption will be 10,000 kWh in Nepal not that we generate 10,000 MW in ten years and export most of it and, thus forcing to continue load shedding in Nepal.

I am not averse to export of electricity but on certain conditions only. The government has the right to export its hydropower only after electrifying all Nepali households. Further the tariff of exporting and importing hydroelectricity should be comparable to each other. i am disappointed with the fact that West Seti Hydropower Project, a reservoir project, exports electricity to India at less that US 5 ¢ per kWh while NEA imports from India at US 10 ¢ per kWh. In the meantime, parts of Nepal are supplied with thermal electricity costing around US 40 ¢ per kWh. West Seti electricity should be primarily used for the development of Seti-Mahakali Region and only surplus electricity should be exported. The export policy should be such that we sell our surplus during rainy season (peak season in India) at reasonable/appropriate price.

The promised 60 MW to be provided to Nepal by India to counter power shortage during winter this year will cost NEA more than Rs 7 per unit (excluding other costs within Nepal) whereas NEA’s weighted average retail tariff is Rs 6.70 only. Therefore, these discrepancies should be resolved in the interest of the country.

The claim of government receiving revenue of Rs 250 billion by exporting 10,000 MW after 10 years is ridiculous. It will only amount to Rs 3 billion commensurate to royalty and tax rates, because the bulk of the amount will be spent in paying back the loan including interest and dividend to the investors, according to Shrestha. It is only about four to five percent that will accrue to Nepal by exporting hydropower. Many assumptions of these people are not grounded to the reality.

It is not necessary that reservoir projects cost more than normal hydropower projects. Large hydropower projects, though reservoir based, cost less than small HP plants due to scale economy. Average cost of construction comes around Rs 150 million per MW. One of the costs that is not included is the inundation or submergence. West Seti HP project inundates 3000 hectares of land including existing infrastructure, forest, wildlife etc which Nepal loses for ever but this cost is not internalized in the cost of the project which is about one billion dollars. West Seti reservoir augments the flow by 90 cubic meters per second of water during dry season which can generate Rs five billion per annum for Nepal based on the Lesotho precedent who charges South Africa $ 25 million per annum for 18 cubic meter per second. But Nepal is going to provide the augmented flow to India free of cost. As West Seti reservoir project is in the north of the Terai districts like Kailali, Kanchanpur, Banke, Bardiya, it should either be developed as a multipurpose project which can irrigate the land in these districts or India should be charged for the augmented flow.

Under Koshi Treaty the embankment was built on both sides of the river, which was breached by Koshi River due to criminal negligence in failing to conduct regular repairs and maintenance of it. With the water from the barrage, less than 7 MW power is generated in Kataiya, India. Because of the embankment breach, Nepal incurred a loss of about Rs 10 billion due to the loss of land, loss of settlement, wild life, industrial production, damage to infrastructure etc. but the loss in terms of electricity is not that substantial due to its small size. Some transmission towers were uprooted because of which Nepal cannot evacuate power from India. Until the diverted river comes back to its original course, neither the hydropower could be operated nor electricity can be imported through that part from where the NEA is said to import 40 MW of electricity until completion of its renovation.

What has been the contribution of Small HP projects?Small HP projects developed by private sector have made substantial contribution. NEA has been building projects at the average cost of more than 3000 dollars per kW whereas private sector has been developing at less than 2500 dollars per kW. Middle Marshyangdi outrageously costs 6000 dollars per kW. Small HP projects are showing how economically can they be built compared to the big projects which are supposed to cost less due to scale economy. Another worthy effort of the private sectors is that they are able to complete their projects on time but NEA’s projects are always delayed. Even the highly acclaimed Chilime HP was delayed by five years.

Transcript of interview taken for BOSS, a monthly magazine which has published some snippets from it in its 15 Jan – 14 Feb 2009 issue.